Q2 2022 Neptune Wellness Solutions Inc Earnings Call

Please standby.

Good day, everyone and welcome to the Neptune Wellness solutions incorporated second quarter 2022 earnings call.

Today's conference is being recorded.

At this time I'd like to turn the conference over to Ultra Caito, managing director of Casey S. A strategic communications.

Thank you operator, and good evening everyone.

Thank you for joining us today.

Well in our solutions fiscal second quarter 2022 earnings conference call.

With me today are Michael Kim Marotta.

President and Chief Executive Officer, and Randy Weaver, Chief Financial Officer.

As a reminder, all amounts discussed today are in Canadian dollars remarks may contain forward looking information representing our expectations as of today may be subject to change today.

Today's conference call contains non <unk> measures.

Typically adjusted EBITDA.

Investors with supplemental measure of our operating operating performance.

Highlight trends in our core business they may not otherwise be apparent when rely solely on <unk> financial measures. Benjamin also uses adjusted EBITDA.

Order to facilitate operating performance comparisons from period to period.

Prepare annual operational budgets and assess our ability to meet our capital expenditure and working capital requirements. Adjusted EBITDA is not recognized define their standardized measure your progress our definition of adjusted EBITDA will likely differ.

That used by other companies, including our peers and therefore comparability may be limited non <unk> measures should not be considered a substitute for or in isolation for measures prepared in accordance with that for us.

Investors are encouraged to review our financial statements and disclosures in their entirety and are cautioned not to put undue reliance on non <unk> measures you use them.

In conjunction with that but then most comparable <unk> financial measures, we do not undertake any obligation to update any forward looking statement, except as maybe required by Canadian and U S Securities laws.

Actions were made in preparing these forward looking statements, which are subject to risks as laid out in our public filings on SEDAR and Edgar I would now like to turn the call over to Michael.

Good evening, everyone and thank you for your time today I'm excited to share a number of updates with you that a part of our larger growth strategy for Neptune and that positioned the company for success. So let's jump right. In this morning, we reported our fiscal second quarter 2022 results the revenue for the quarter totaled $15 seven.

A 27% increase from Q1. This was our third consecutive quarter of revenue growth since making this strategic pivot to focus on branded revenue, we continue to make improvements to our top line as well as gross and operating margins. Our scaling efforts have gained traction we've reduced expenses.

Our brand and subsidiaries during the quarter, our market position and product demand was better than expected and cannabis organic food and beverage and Nutraceuticals, which continues us on our path to profitability.

Before we move on to our operational highlights for the quarter I would like to provide shareholders with an update on our strategic review committee through which the board in partnership with management began evaluating the company's business plan capital deployment and long term strategic recommendations to enhance shareholder value through a thorough review of the company's near.

Term opportunities and existing operational and financial position. The management developed a comprehensive action plan focused on unlocking shareholder value through the improvement of Neptunes cost structure as well as through the reallocation of resources towards high growth projects per our announcement. The board of directors has approved the management comprehensive action plan.

<unk>, which we have begun implementing immediately the plan includes cost cutting initiatives and reorganization of the company's operations and resources towards high growth and high margin opportunities that are estimated to generate annual cost savings of over $10 million USD. These measures will provide immediate and ria.

Current cost savings positioning <unk> for profitable growth and improved cash flow going forward Randy Weaver, our newly appointed interim Chief Financial Officer was instrumental in developing these action steps and will elaborate on the individual measures in the financial section shortly to that end I would like to welcome Randy to the napkin team I feel.

Confident that his financial expertise will be invaluable as we execute on our action plan now I will turn to the operational highlights from the fiscal second quarter first let's talk about cannabis during the quarter candidates continue to be a key growth driver for us as we more than doubled our Canadian store count to over 1000 from 400 stores in the <unk>.

Good quarter and as such our revenue growth has accelerated in each category across <unk> and <unk> brands. Our current store presence marks the halfway point, along our path to penetrate 2000 store market, where we operate Alberta, British Columbia, Ontario, and Quebec, representing over 80% of Canada.

Total legal market following the launch of our flower brand in the first quarter and August of this year, we achieved significant growth represented by a four seven times increase in flower sales compared to the prior quarter as consumer demand for Neptune carefully selected strange grew well beyond our expectations.

Additionally, we are excited to announce the launch of a mood ring vape products in the territories of Ontario, Alberta, and British Columbia, One vape product line in Ontario, and to vape products in line across Alberta, and British Columbia, Our new <unk> feature premium strained with 510 thread cartridges.

And have produced sustainably with biodegradable mouth pieces, the product leverages, our patented extraction process, which produces large quantities using low amounts of LNG, we see a significant opportunity to scale. These high margin products across Canada, which will help us meet our 1 million <unk>.

Per month run rate the vape market is a fast growing segment of the Canadian cannabis market currently the third largest category by sales in Canada. According to headset data, we plan to continue introducing new cannabis products in the coming quarters and additional skus within our existing product lines to scale growth.

Last month, we were granted an extraction patent which protects the process that we have developed through years of science backed research with this pattern, we are able to license our processes to cannabis manufacturers, which would expedite the time to market and improve yields and ultimately presenting an opportunity for Neptune to generate additional sources.

Reoccurring high margin revenue for years to come. Furthermore, we see an opportunity to license this technology, allowing us to gain exposure to developing cannabis markets such as in the United States without the need to establish operations next lets move on our Nutraceuticals, we've achieved a record revenue quarter for bio <unk> supplement.

Subsidiary. This was largely driven by continued increase in consumer demand for immune boosting supplements as well as the launch of our recent innovations, which attracted new partners like most in the industry, we have seen modest supply and retail price increases for our products, which have been absorbed by the consumer launching innovative turnkey solution products.

Critical for this category as our partners rely on us to produce exciting new products to keep consumers engaged our data demonstrates that consumers are interested in alternative delivery forms as a result, we have been working on and recently launched a line of vitamins sprays and pumps in the U S and in Canada, thus far the products have been well received.

And I expect it to expand our distribution over the rest of this calendar year and into next we also are proud to have recently launched our new by drug a website and have been increasing our participation at industry events to elevate by drug as brand awareness now lets turn to organic food and beverages, we have significantly improved our market position and financial.

Strength in the second quarter falling one the full integration of sprouts to the continued expansion in the U S market three the introduction to select Canadian retailers and for the improvement in our supply chain. Despite industry wide supply chain issues, we were able to manage fulfillment on strong consumer demand.

Throughout the quarter and successfully expanded into hundreds of new cells, leading to quarter over quarter topline growth as mentioned in our strategic review update we have improved supply chain efficiency and reduce overall supply chain costs, which will lead to gross margin improvements and improve cash flow during the quarter, we started production.

Of the Coca Mellon characters relating to our licensing agreement with Coca Mellon the world's leading children's Entertainment brand. We expect to begin distributing these products by the end of the year finally, while we're not yet prepared to talk about the impact of ESG today I want to make it very clear napkin cares deeply about and is committed to integrating ESG.

All of our business, we will have more to say on this topic next quarter with that I will turn over the call to Randy to discuss the financial results. Thanks.

Thanks, Michael first of all I am thrilled to join the <unk> management team. It is an exciting time, we're completing an incredible transformation in a very short period of time, becoming a diversified CPG company as.

As we look ahead, we have lots of opportunities to scale, our brands across high growth markets, Canada, nutraceutical food and beverage.

Truly good for you products and good for the planet products now, let's get into our financial results for the quarter we.

We can discuss the operational and financial action steps as well that we've recently taken to unlock shareholder value. Our second quarter 2022 revenue was $15 7 million Thats, an increase of 27% from first quarter revenue of $12 4 million and a decrease of 38% compared to the year ago quarter the year over year comparisons.

More difficult because of our business transformation. The decline between years was primarily driven by a reduction in COVID-19 related products that we're no longer selling as well as our transition out of our <unk> extraction business in favor of the current BDC cannabis business. Those declines were partially offset by an increase in food and beverage from our sprout acquisition the quarter over.

<unk> sales growth was mainly attributable to the expansion of sprout products across North American retailers and record sales from <unk>, our <unk> Nutraceuticals business negative gross profit during the quarter was $1 $5 million, including inventory impairments of $3 $7 million related to sugar leaf and innovation operations that compare.

Some negative gross profit of $4 7 million in the year ago period, an improvement of $3 2 million or over 65%, even with the inventory of impairment SG&A expenses for the quarter were $17 8 million a decrease of 600000 compared to the same period of the prior year.

The SG&A decrease was driven by a reduction in advertising fees related to Amazon warrants and other one time expenses in the comparable period, partially offset by increases in salaries and benefits marketing insurance and bad debt.

Net loss attributable net tuned for the quarter was $14 million, which declined from a net loss of $22 million in the comparable comparable year ago period the.

The decrease in net loss is mainly attributable to increased gross margins the decrease in SG&A and a positive revaluation of derivatives.

Adjusted EBITDA loss during the quarter was $9 5 million, an improvement of $3 $5 million versus our adjusted EBITDA loss of $13 million in the comparable year ago period.

The improvement in adjusted EBITDA is mainly attributable to increased gross margins due to the exit from several product lines.

Moving onto our balance sheet, we ended the quarter with $38 million in cash on hand, we expect our cash on hand to be adequate for the foreseeable future. Currently we have little debt all of which are subordinated and at the same time, we have assets to leverage we may seek additional financing in various forms to ensure we have the right funding structure in place.

To support our growth trajectory in the past we have been successful with these fundraisings, we expect to be successful again. However, there can be no assurance that will be the case I would like to now talk about additional details related to the action plan coming out of Neptune Strategic review as Michael noted the board of directors approved initial actions for our comprehensive action.

Related to our strategic review our plan includes cost cutting initiatives and reorganization of the Companys operations and focusing our resources towards high growth and high margin opportunities, we're estimating annual cost savings of $10 million or $12 million Canadian we've already begun executing these actions immediately where priority.

<unk> bio Droga sprout foods and cannabis as the key growth drivers of our business moving forward, we're putting all of our resources toward their success. We expect each of these to contribute positively to our results with limited additional investments, let's talk about <unk> bio Droga remains a positive contributor.

Cornerstone to further develop our suite of nutraceutical products, which can be sold across multiple brands. After a record sales quarter. In Q2, we plan to strengthen our brand awareness and promote new products through industry participation and driving traffic to our new website. Sprout has also demonstrated continued progress in the two most recent quarters and remains.

<unk> on track with the Coca Melon product launched by the end of this year, we will continue to increase distributions of existing sprout products and introduce new product offerings for implementing several initiatives to improve sprouts margins and optimize our supply chain moving onto cannabis during our strategic review, we took a hard look at the right strategic.

For this part of our business over the last year, our cannabis business in Canada has achieved improved efficiencies and steadily increases revenues since changing to branded products. We are approaching our goal of $1 million per month run rate, which we expect we will hit in the latter part of our fiscal year. We also now expect that our cannabis business with limited additional.

Investments will begin making positive contributions during the second quarter of our coming fiscal year and will be an important part of our growth strategy. We plan to continue executing new product launches like the mood ring based products and we will continue expanding our full cannabis product offerings into the four Canadian territories, where we operate we're eliminating <unk>.

Non core operations and reallocating the most promising projects from these groups, including adult forest remedies, gummies and eco table to the corporate team for further evaluation and actions we have implemented immediate personnel reductions to streamline our operations and to ensure we have the right organizational structure for the size and scope of our current.

Business, replacing a temporary freeze on nonessential hiring these decisions remove SG&A costs, while not affecting our growth plans. Finally, I want to emphasize that we are fully committed to continuing to build a culture of improved transparency and accountability across the entire business, ensuring we are positioned for success in the long term.

We believe this action plan leads to immediate and recurring cost savings as well as streamlining our focus on our high margin growth opportunities and closing as we look to the remainder of our fiscal year, we remain confident in delivering sequential revenue growth and expect gross margins as well as adjusted EBITDA to continue to improve we will share a more.

<unk> outlook for the full year and comment on next fiscal year with our next quarterly call lets now turn the call back over to Michael. Thank you Randy before we open the call for questions I would like to provide a bit more color on our growth strategy operational initiatives and our vision for the future Stein with cannabis we are rapidly expanding across Canada territory.

And have seen outstanding consumer interest in our flower products, which are experiencing strong levels of demand. We attribute the success of our flower products to the unique seasonal selections we offer carefully chosen by our cannabis team. This has driven quarter over quarter growth across all of our cannabis categories and as a result, we are quickly approaching a $1 million.

Monthly run rate for cannabis, which we still believe will occur by the end of this fiscal year. The next important milestone for our cannabis business will be the successful rollout of our mood ring base as a result of the strong growth of our flower products today as well as the launch of our high margin mood ring Vape products, we now anticipate a positive.

Contribution from cannabis by the end of next fiscal year, while we continue to establish ourselves as a trusted premium cannabis brand. We are also building a foundation in the maturing CBD market through our various brands and forms such as mood ring and Pan has CBD oils. We are also building on the traction from IR.

The health and wellness products, particularly in our nutritional supplements, we are leveraging the most advanced delivery systems and our patented maximal technology to offer consumers flexible products, such as vitamin sprays gummies soft gels with increased absorption and onset compared to other products.

Maximus is a key determiner within our supplement portfolio is our Omega three fatty acid delivery technology that uses enzymes to mimic the natural human digestive system, two predigest Omega three fatty acids earlier, this year and in randomized triple blind crossover controlled clinical.

<unk> trial maximal was proven to be three five times more absorb it than standard fish oil. In addition, we have established study protocols for a clinical study on maximal efficacy and advancing both CBD and THC bio availability and onset and expect patient enrollment.

To begin in the coming months the results of both of these studies will allow us to further accelerate the marketing of Maximo by making additional health benefit claims and educating our distribution partners and consumers of the benefits of our product and we see significant opportunities to license maximo with.

CBD and THC, particularly in the United States, turning to sprout, we're focusing on our efforts on establishing sprout as a leading organic baby and toddler foods brand through the introduction of new product lines, notably the cocoa melon product launch scheduled for the end of the year to date we've continued.

To generate quarter over quarter sales growth and increasingly penetrate the north American retail chains in Canada. We are now available in select Metro in London drugs, and Toby stores as I look to where <unk> was 12 months ago I am extremely proud of how quickly we have implemented the strategic shift in our business strategy to a fully integrated consumer.

Packaged goods company and our improved operational performance as a result this quarter. The measures we are taking as part of our comprehensive action plan will further enhance our performance and financial position through an annual cost savings estimated at over 10 million USD Neptune continues to be focused on creating natural.

<unk> plant based sustainable purpose driven brand with truly good for you and good for the planet products. We believe there is always a greener healthier better way and are committed to embedding environmental and social governance and all levels of our business before I conclude today's prepared remarks.

I would like to thank our employees for their dedication and hard work as well as thank all investors and stakeholders for their commitment to Neptune and our long term mission to deliver all natural products that Neptune and its customers can stand behind operator, you may now open the line for questions.

Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad.

You are using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment.

Again press Star one to ask a question and we'll pause for just a moment to allow everyone an opportunity to signal.

And our first question will come from Aaron Grey with Alliance Global partners.

Hi, good evening and thank you for the questions.

Randy welcome aboard to the team.

So first question for me.

Moving to the cannabis business you guys talked about the quarter over quarter trends seem to highlight sprout and about drove more than cannabis, but at least according to some of the third party data cannabis seems to be doing very well quarter over quarter. So just wanted to get some further commentary, particularly about how cannabis.

Did during the quarter and then also in terms of your commentary on reaching the one month.

By the end of the fiscal year.

Our consolidated appears that you might already be approaching that so just wanted to kind of dig a little bit further into that commentary and then lastly on cannabis positive contribution.

By two key fiscal 'twenty 'twenty three just one clarify is that that's a gross margin when you say positive growth country.

Contributions just wanted to clarify that thank you.

When we talk about positive contribution for the cannabis business, we're talking about the overall operation contributing positively to corporate overhead.

And certainly we expect to have positive gross margin before that.

In terms of the quarter over quarter revenue growth, yes, the cannabis business is continuing to increase quarter over quarter, and we are approaching that million dollar a month figure.

We don't release.

Specific data on that but we're getting very close and I think that's why you see us changing the the.

The forecast for when we're going to achieve cash positive contributions for for the cannabis business.

Okay awesome.

When you say for operations for cannabis being positive is it fair to say EBITDA as a proxy for that.

EBIT, though as a proxy for that.

I suppose that's a fair comparison, yes, I think we certainly look at the business that way and we're looking at absorbing all of its overhead there in the plant and contributing positively to the corporate overhead. So EBITDA would be a fair comparison of that I believe.

Okay Awesome, that's great to hear.

And then just second question for me just taking the cannabis more kind of high level topline opportunities.

A lot of movement within the market in terms of pricing pressure.

The current larger market share players, losing share you guys have been some of the gainers. It appears quite a third party data so Mike we've.

We've talked about in the past in terms of the opportunities.

For you guys kind of gain share there a lot of people seem to be using pricing as a lever to gain market share. So as you are looking to continue to build out the flower brand and now entering mood ring with faith just wanted to see how you are now analyzing the marketplace and where you're seeing opportunities for market share gains. Thank you.

Yes, I think it's really focusing on the quality of the product and I think the seasonal selection has worked really well with us because we are definitely seeing that the consumer is constantly changing mix requirements in.

And definitely what its profile is so like for instance, a lot of like flowers. They have over 24% THC with up to 3% or more turbines. So we've been really focusing on what the consumer is buying flower and also looking at that profile in that tape. So think about like Kraft Kraft experience.

And the flowers. So I think it's driven a lot of demand and we actually learned a lot through online initial launches and definitely honing in and focusing on that I think that when it comes into the base I think that's an area because of our unique patent that we've got in <unk>.

Lot of our experience.

With that facility to be able to be able to have a premium margin as well as be able to be reactive if needed, but we definitely are focusing on the trend and what the consumers buying even though our capsules that you kind of alluded to you in.

In the market, we've actually been over performing our expectations and so we definitely are seeing that where we have products that it can be ranking number one.

Certain areas and so our focus is really looking at that consumer and making sure that we have the right product for them as well as being very cognizant of the adoption and obviously in the different territories and I think David is going to be a huge key for us and especially because of our technology and also our focus on making sure that we're supporting that consumer with the goal of.

To like we're planting trees with different purchases and stuff along those lines and really getting connected to the consumer and what the ISI.

Okay, great. Thank you very much for the color and I'll go ahead and jump back into the queue.

And our next question will come from Gerald Pascarelli with Cowen <unk> Company.

Hi, This is Victor MA on for Gerald Pascarelli and thanks for taking my question.

Now that we're halfway through fiscal <unk> can you give some color on how revenues are trending well.

While you delivered this quarter.

Can you repeat that I didnt quite understand the question.

Yes, sure. So so now that we're halfway through fiscal <unk>.

Give some color on how revenues are trending relative to what was delivered this quarter.

I think we talked in the remarks about sequential revenue growth.

I believe that that's a fair comparison, we expect expect to see continuing revenue gains in both our Q3 and Q4.

Okay.

Great I appreciate the color and just one more question if I can how much of a benefit did mood ring have on revenues.

And do you expect this to become more pronounced on the back half of this year or more so in fiscal 'twenty three.

It had a positive effect on revenues and I expect that to continue for the rest of the fiscal year end and into 'twenty, three and continuing beyond that actually.

Yes.

Understood appreciate the color. Thanks.

Okay.

And once again, if you'd like to ask a question. Please press star one.

And we'll pause for just a moment.

And we have no further questions signaled at this time.

I'd like to conclude today's conference call. Thank you everyone for your participation and have a great day.

Okay.

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